TICKERS: ARNA, EW, NAVB, OREX, VVUS
Catalysts Move Drug and Medtech Stocks: Michael Hay and Jocelyn August
Source: George S. Mack, The Life Sciences Report (5/3/12)
When studying stock charts it is not hard to see sharp spikes up and deep nosedives related to development milestones and setbacks in the life cycle of a drug or medtech company. The analysts at San Diego-based Sagient Research Systems have made a science out of following the regulatory and media events that can move stocks. In this exclusive interview with The Life Sciences Report, Sagient Vice President Michael Hay and Senior Analyst Jocelyn August demonstrate their expertise with actionable ideas and provide names of companies through which investors might reap profits.
Michael Hay: With BioMedTracker we are following all the clinical drug development phases through the U.S. Food and Drug Administration (FDA) approval process. Clinical development is, obviously, a very risky undertaking, with about one in 10 products making it from phase 1 all the way to approval. There are steps or milestones along the way that each company needs to achieve before the FDA will approve a drug. Any catalyst or event that changes that 1-in-10 probability becomes a pretty significant event to investors.
TLSR: How significant is progression from one phase of development to the next?
MH: When we think about stock prices, we think about a probability-weighted net present value (NPV) for a stock. Very simplistically, if you have a company that is developing a $1 billion (B) drug and you think there is a 50% chance of it being approved, then you would pay $500 million (M) for it. If you have a phase 2 drug that shows good data, which allows you to move to phase 3, the risks you would apply to that drug move from maybe a 20% chance of approval in phase 2 to over a 50% chance of approval in phase 3. That's a large jump in NPV.
Generally, you see about 10% of phase 1 drugs being approved, 20% of phase 2 and 50–55% of phase 3 drugs. The top-line results at each stage of clinical development are very important. More than 80% of drugs that reach the FDA with a filed new drug application (NDA) are eventually approved. This may not occur on the first review but over the course of several years of going back and forth with the FDA.
TLSR: Talk to me about types of catalysts.
MH: You have four different types of events that you know the timing of quite well, and these are very good for trading or staying out of the stock (if you want to reduce your volatility). They are the top-line results, the Data and Safety Monitoring Board (DSMB) analysis and FDA regulatory events, which include advisory panels and Prescription Drug User Fee Act (PDUFA) decisions.
TLSR: With what catalyst do you see the greatest moves in share prices?
MH: We see the largest moves with the DSMB analysis. This is an interim analysis of data to see whether or not the trial is safe and should continue. The DSMB may also assess the efficacy of the drug; if the efficacy data are positive and strong the trial may be stopped early for positive reasons. The DSMB tends to be the largest mover for stocks because it either stops clinical development or dramatically increases the chance of the drug being approved.
Probably the most well-known catalysts are the FDA's PDUFA review-related catalysts. There are a number of different actions and procedures the FDA goes through to approve a drug. Two main ones pop out in terms of having an impact on stock price.
First are FDA advisory panels, of which we've seen an increase over the last four years with the legislation of PDUFA IV. To garner advice, the FDA will call a group of experts in the field to sit on a panel, typically between 10 and 20 people, and they vote on whether or not the drug is safe and effective and should be approved. This happens before the PDUFA date. This is a volatile event because you have a yes or a no recommendation, depending on the vote. The FDA doesn't always follow the panel vote, but it usually uses the comments and the outcome as a guideline for what it will do in its review.
The second is the PDUFA date. This is the agreed-upon date on which the FDA is going to approve or not approve a drug. It is nice because you have a fairly firm date that you can place a trade around. You know there is going to be volatility at a certain timeframe. The PDUFA date actually has quite a big impact on a company's stock. The ultimate goal is to get a drug approved so you can sell it. This is, many times, the final piece to derisking the clinical development puzzle.
TLSR: If you have a PDUFA date with a no on approval, does the stock tend to decline to a greater extent than it would ascend if you have a yes?
MH: Though some of the largest gains are over 100%, overall I think they do decline more than they go up.
TLSR: What catalyst has the most durable effect on price movement? I'm looking for the longest lasting result, not a blip.
MH: That's a tough one. There is always another milestone. There are milestones up to approval, and then even after approval a lot depends on how well you can sell your drugs. I think the largest durable effect that bolsters companies for the longest time and enables them to raise money is positive data at the end of phase 2, where you get proof of concept. Solid phase 2 data allows you to design a number of different phase 3 trials and get funding for those. Phase 2 data have a durable effect in terms of propping up the stock for a long time, until you see the next milestone. Beyond that, phase 3 development programs typically take a long time. If you have good data with a phase 3 trial, you're going to file an NDA fairly quickly, and your next milestone is going to be FDA approval. You don't have as long a duration to ride a positive phase 3 trial result.
TLSR: You follow three companies that are developing obesity drugs. The FDA's Endocrinologic and Metabolic Drugs Advisory Committee panel met on Feb. 22 and voted 22-2 to recommend approval of VIVUS Inc.'s (VVUS:NASDAQ) drug Qnexa (phentermine and topiramate). VIVUS shares reacted very positively, along with shares of obesity product developers Orexigen Therapeutics (OREX:NASDAQ) and Arena Pharmaceuticals Inc. (ARNA:NASDAQ). The stocks moved together on the VIVUS panel vote. What does this tell you?
MH: This is not uncommon at all. Your portfolio's competitors are important to watch. The competitive landscape and pipeline attributes of services such as BioMedTracker and CatalystTracker are very helpful in tracking competitors and knowing the important events that are going to impact your portfolio.
TLSR: Jocelyn, you follow devices and diagnostics. Would you compare device and drug development?
Jocelyn August: Development of devices and diagnostics follows a similar but slightly less rigorous process than drug development. Medical devices are approved by the FDA through either the 510(k) or premarket approval (PMA) processes. A 510(k) is a submission made to the FDA demonstrating that a device is at least as safe and effective as, and substantially equivalent to, predicate devices already legally marketed.
We think the PMA process is more interesting in terms of development because it is similar to the process for drugs. FDA does a scientific and regulatory review to evaluate the safety and effectiveness of class 3 medical devices. Class 3 devices are those that support or sustain human life and are of substantial importance in preventing impairment of human health or that present potential unreasonable risk of illness or injury.
In general, companies that are going for a PMA have to get an investigational device exemption (IDE), which is basically the start of a pivotal clinical trial process. We don't generally have a phase 2-, phase 3-type of stringent development process, as we do with drugs. But there can be phase 2 and phase 3 trials. Pivotal trial data are used to support the PMA application, and these top-line data are the big market movers.
A lot of device companies will very specifically say they are going to present data at certain conferences, and it is great to be able to have a specific date upon which you will be able to trade based on the volatility. You do see much the same kind of volatility with devices as you do with drugs.
Once a device marketer gets to the pivotal clinical trial and releases these data, it will file for the PMA, and a lot of times there will be an FDA advisory panel meeting, just as with drugs. Advisory panel dates are great for trading because they are specific dates known to the investment community.
TLSR: Jocelyn, could you describe some of the principle differences between device and drug approval processes?
JA: One area in which the device PMA process is different from the drug approval process is that with drugs there are PDUFA dates, on which the FDA will give a yes or no decision. For devices, it is a little murkier. The FDA has a 180-day review period in which to provide an update or decision directly to the company about the PMA. But there isn't a specific date. It is a date range. What we have seen recently are a lot of PMA applications experiencing delays at the FDA. Device companies will give updates about applications and will say they are still waiting. So it is a lot harder to predict a specific date for an approval, like we see for drugs with the PDUFA date.
Trading can be more difficult because it is based on what you're hearing from the company and hearing on conference calls, as well as understanding the overall atmosphere and what the FDA has said in the advisory panel meeting. Trading is also based on the atmosphere around the types of devices that are being approved or not approved, and understanding the different trial data.
TLSR: Can you discuss some diagnostic or device companies?
JA: One of the really interesting companies, which has an actual PDUFA date coming up in September, is Navidea Biopharmaceuticals Inc. (NAVB:NYSE), formerly Neoprobe Corp. It has a diagnostic, but it is regulated through the PDUFA. The product is Lymphoseek, which is a lymph node-targeting agent intended for use in intraoperative lymphatic mapping, a technique that employs injected dyes to identify diseased sentinel nodes to map cancerous cells. Currently, only vital blue dye is approved for these procedures. When Lymphoseek is injected into the sentinel nodes, it follows a natural drainage path from the primary tumor into the first tier of the surrounding lymph nodes, so you can actually use just the sentinel node to tell whether there is a disseminated malignancy or not. It is a much less invasive way to determine whether or not a cancer has spread to the lymph nodes.
TLSR: What about the catalysts?
JA: The PDUFA date is set for Sept. 10, 2012. It went through all the clinical trials, just like a drug would. The phase 3 clinical trial data came out in 2011, and the NDA was filed. Lymphoseek met all the primary and secondary endpoints, and it was shown to be superior to vital blue dye. Lymphoseek actually detected more than 99% of positive nodes identified by vital blue dye, which actually missed 25% of the nodes that were subsequently confirmed as containing cancer. Navidea wants to market this as a superior agent for intraoperative lymphatic mapping. We think the PDUFA date will be an interesting catalyst because Navidea is a really small company.
TLSR: Its market cap is $262M.
JA: Yes, and it doesn't have anything else approved yet by the FDA. It tried to focus a lot of what it is doing on Lymphoseek.
TLSR: Let me understand. Lymphoseek is used intraoperatively to dissect out disseminated disease and to preserve tissue. Is that right?
JA: Right. Otherwise, you have to do a much more invasive procedure and take a lot more tissue from patients to figure out whether or not the cancer has spread to the lymph nodes. It is much better for the patients.
TLSR: The PDUFA date was extended for three months. What does that mean, and how does that affect a company generally?
JA: A company would obviously like to get approval sooner, but in this case the extension doesn't appear to be negative for Navidea because its trial data were all pretty positive. It was just a 90-day extension.
MH: We've actually looked at these extensions. I think it is a similar situation to what you see with drugs. If the FDA receives a major amendment close to the time that it is expected to announce its decision, it can extend the review by 90 days. We've looked at that data, and we have actually found that a higher percentage of drugs go on to be approved after an extension. You probably see a dozen extensions every year.
TLSR: So an extension is not an overall negative?
MH: Not really. It just means that the FDA has been given another piece of information, which most likely it requested, and it needs more time to review it. Typically, that signals good communication between the FDA and the sponsor.
TLSR: Did you want to mention another company?
JA: I wanted to mention Edwards Lifesciences Corp. (EW:NYSE). It is developing the SAPIEN, which is a bioprosthetic transcatheter heart valve (THV). It was approved in November 2011, but only for treatment of inoperable patients with severe symptomatic aortic stenosis. Edwards is developing SAPIEN further to be approved to treat patients who are eligible for open heart surgery but are very high risk. Last week, the FDA scheduled a June 13, 2012, advisory panel meeting for the SAPIEN PMA application for the high-risk cohort. We believe this is going to be an interesting event for Edwards. There has been a lot of talk in the investment community about it. Right now the approved SAPIEN market is pretty small. Getting it approved for patients who are otherwise eligible for surgery would be a great step forward.
TLSR: Edwards is down 17% over the last 12 months. Would approval for expanded use in high-risk patients have a major effect on share price?
JA: I don't think it is going to have as big of an effect on the share price as the Navidea PDUFA. Edwards is a much larger company, with an $8.4B market cap. SAPIEN is not going to have as big an effect on Edwards as the Lymphoseek approval will have on Navidea, with a $268M market cap. But it is still interesting and we think it will definitely affect the stock price for Edwards.
TLSR: Michael, could we talk about the three obesity stocks and their catalysts?
MH: We have three companies with drugs advanced to the FDA review process: VIVUS, Orexigen and Arena. Each has been issued a complete response letter, and each is working now to address FDA concerns. Arena and VIVUS have both refiled applications with data requested from the FDA. To fulfill its response Orexigen is looking to start a preapproval cardiovascular outcome study to rule out a certain level of cardiovascular risk before it can gain approval.
As previously stated, the VIVUS advisory panel voted 20–2 in favor of Qnexa's approval. I think this was more positive than anyone had expected, and you saw a 100% increase in the stock price because of that. Its PDUFA date has been extended for three months, until July 17, 2012, because VIVUS had submitted data related to a Risk Evaluation and Mitigation Strategy (REMS) program that was requested by the FDA. A lot of this is related to a component in Qnexa that presents a small risk for birth defects. It is trying to limit the number of women who might get pregnant while on the drug, so there is going to be a fairly strict REMS program. After such a positive vote we now expect Qnexa to be approved. I think there is a lot of pressure on the FDA right now to approve some weight-loss drugs.
TLSR: What about Arena?
MH: Arena is developing another obesity drug, lorcaserin (APD-356; anticipated trade name Lorqess), and it has an FDA advisory panel coming up in May. As we have seen from the VIVUS panel, this could be a very volatile event. It is going to be a yes or no for the drug. This drug might have a little tougher time because the efficacy isn't as good as VIVUS's Qnexa, though it does appear to have fewer side effects. We will find out if a better safety profile is able to push it over the hurdle. However, I think we are leaning more toward the negative side for this upcoming Arena panel. The PDUFA date is June 27, 2012.
TLSR: What about Orexigen?
MH: Orexigen is a couple of years away from any data coming from the cardiovascular outcome study it is starting for Contrave (naltrexone/bupropion). It has another pipeline asset in obesity, Empatic (zonisamide/bupropion), which has a similar component to VIVUS's drug. It is waiting to see what the FDA does with Qnexa. If Qnexa is approved, Orexigen may be able to monetize some of the Empatic rights and get a partner to do some phase 3 studies. Empatic has only had phase 2 trials.
It's a very interesting space with a lot of events coming up for companies that are smaller in market cap. VIVUS is at about $2B now.
TLSR: Twelve months ago VIVUS had a $650M market cap. It has tripled. Arena has a market cap of $386M. Although Arena's lorcaserin has reduced efficacy versus Qnexa, I think physicians are inclined to use therapies with reduced or fewer off-target effects. Arena has a lot of upside judging from the VIVUS surge over the last one-year period.
MH: I would agree with that assessment. I think more people think lorcaserin won't be approved, so you have a greater upside with Arena if the product is approved, especially looking at where VIVUS's market cap is. If lorcaserin is approved, there are definitely aspects that make it more favorable. Maybe you try lorcaserin first to see the response, before you try a more potent, less-safe drug. I think you're right. There is more upside in Arena. However, if you look behind lorcaserin, there is not much left in Arena if this drug is not approved.
TLSR: Thank you so much for this fine discussion.
MH: Thank you. We enjoyed it.
JA: Thank you very much.
Michael Hay has been with Sagient for more than seven years and has more than 11 years of experience in financial markets. He manages the BioMedTracker analyst team and serves as vice president at Sagient. He is also responsible for product development, corporate planning, and sales and marketing. Hay has consulted for numerous top-tier pharmaceutical companies on strategic decisions, as well as worked closely with top healthcare investment firms providing insight on investment and trading decisions. Hay's career in financial markets began at Thomson Financial in 2000. He reached the position of manager, capital markets intelligence, and was directly responsible for corporate client relationships within the technology sector. At Thomson he consulted for senior management regarding shareholder composition, financial markets and competitive positioning. Hay received a bachelor's degree in finance from University of Colorado, Boulder.
Jocelyn August is currently the senior analyst and product manager for CatalystTracker, a proprietary research product focused on identifying and analyzing the future events that will materially impact publicly traded companies. Efficient, organized and intuitive, August is responsible for shaping the product strategy for CatalystTracker, as well as facilitating the intersection between client needs and product specifications and enhancements. In her five years at Sagient, she has developed expertise in the highly event-driven medical device and diagnostic sector. In addition, she spearheaded the development of a new natural resource industry product within the CatalystTracker product line with the publication of the Catalyst Impact Study: Natural Resources Sector. She also manages the CatalystTracker analyst team. Outside of Sagient, August was named the director of communications for the San Diego Professional Chapter of MBA Women International. August received a master's degree in business administration from the Rady School of Management at the University of California, San Diego, and graduated cum laude from UC San Diego with a bachelor's degree in sociology.
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1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Edwards Lifesciences Corp. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services.
3) Michael Hay: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.
4) Jocelyn August: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.